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EUROPEAN ECONOMY

Economic and Financial Affairs

ISSN 2443-8022 (online)

EUROPEAN ECONOMY

Spending Reviews: Some Insights from Practitioners

Edited by Elva Bova, Riccardo Ercoli and Xavier Vanden Bosch

DISCUSSION PAPER 135 | DECEMBER 2020

Workshop Proceedings

European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate.

DISCLAIMER The views expressed in this document are solely those of the author(s) and do not necessarily represent the official views of the European Commission. Collection of contributions started before 31 December 2019, before the economic impact of the COVID-19 pandemic reached Europe. In some cases, authors made reference to the current situation in their final drafts.

Authorised for publication by Lucio Pench, Director for Fiscal Policy and Policy Mix.

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Neither the European Commission nor any person acting on behalf of the European Commission is responsible for the use that might be made of the information contained in this publication. This paper exists in English only and can be downloaded from https://ec.europa.eu/info/publications/economic-and-financial-affairs-publications_en.

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European Commission Directorate-General for Economic and Financial Affairs

Spending Reviews: Some Insights from Practitioners

Edited by Elva Bova, Riccardo Ercoli and Xavier Vanden Bosch

Abstract

Spending reviews have been on the rise in the European Union Member States. However, readily accessible

tips and guidance for governments embarking in a spending review are missing. This publication explains

the why and how related to designing and conducting a spending review, using a practitioner’s lenses.

Targeted to policy makers and government officials, the various chapters featured in this publication

combine views of both policy makers and practitioners in national and international institutions with direct

experience in the field. This work also presents some country-specific experiences with a focus on

implementation risks and possible bottlenecks that can come up along the ‘journey’.

JEL Classification: H50; H8.

Keywords: Spending reviews, public financial management, public policy evaluation.

Contact: Elva Bova, European Commission, Directorate-General for Economic and Financial Affairs,

elva.bova@ec.europa.eu; Riccardo Ercoli, European Commission, Secretariat General,

riccardo.ercoli@ec.europa.eu; Xavier Vanden Bosch, European Commission, Secretariat General,

xavier.vanden-bosch@ec.europa.eu.

EUROPEAN ECONOMY Discussion Paper 135

mailto:elva.bova@ec.europa.eumailto:iccardo.ercoli@ec.europa.eumailto:xavier.vanden-bosch@ec.europa.eu

Michelangelo Merisi da Caravaggio (1599-1600). The Calling of Saint Matthew (oil on canvas –fragment). Rome: San Luigi dei Francesi.

https://en.wikipedia.org/wiki/Caravaggio

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CONTENTS

FOREWORD (Xavier Vanden Bosch, European Semester Officer in Belgium) ................................. 5

1. Introduction (Lucio Pench, DG ECFIN) .......................................................................................... 6

2. Spending reviews in the EU: Theory and practice (Stefan Ciobanu and Elva Bova,

DG ECFIN) ........................................................................................................................................ 8

3. How to initiate a spending review? A Minister’s view (Edward Balls, former UK

Government) .................................................................................................................................... 18

4. How to identify areas for saving and efficiency-enhancing options A top-level

official’s view (Koen Algoed, Government of Flanders).......................................................... 28

5. How to integrate spending reviews in the budgetary cycle? (Edwin Lau, OECD) ............ 35

6. How to conduct a spending review in a federal government setting?: the Spanish

case (José Luis Escrivá, Spanish Independent Authority for Fiscal Responsibility) .............. 44

7. EC Support to Member States in conducting Spending Reviews (Riccardo Ercoli,

DG Reform) ...................................................................................................................................... 50

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LIST OF TABLES

Table 4.1. Capital expenditures in percentage of GDP .................................................................... 29

LIST OF FIGURES

Figure 2.1. Phases of the spending review ............................................................................................ 10

Figure 2.2. Selected country specific recommendations .................................................................. 12

Figure 2.3. The Eurogroup Common Principles .................................................................................... 13

Figure 2.4. Political commitment along the spending review phases ............................................ 15

Figure 2.5. Main challenges in conducting a spending review ....................................................... 15

Figure 3.1. Importance of political commitment ................................................................................. 20

Figure 3.2. Evolution of public service agreements ............................................................................ 23

Figure 3.3. Smartening up PSA targets ................................................................................................... 24

Figure 4.1 . Total cost of the SV scheme in Flanders (in thousand euro)......................................... 32

Figure 5.1. General government gross debt as a percentage of GDP, 2007, 2009, 2015

and 2016 ................................................................................................................................... 35

Figure 5.2. Structure of general government expenditures by economic transaction,

2015 and 2016 and change 2007 to 2015 .......................................................................... 36

Figure 5.3. Adoption of spending reviews (2011-2018) in OECD countries ..................................... 37

Figure 5.4. Main objectives of Spending Reviews over the past 10 years ...................................... 39

Figure 5.5. Main results of Spending Reviews over the past 10 years .............................................. 39

Figure 5.6. Use of performance information during budget negotiations between CBA

and line ministries (2018) ........................................................................................................ 41

Figure 5.7. Main challenges for the implementation of spending reviews’

results/recommendations ..................................................................................................... 42

Figure 6.1. Governance model ............................................................................................................... 46

Figure 6.2. Projects of 2018 SR .................................................................................................................. 47

Figure 6.3. Stakeholders involved on project 2(retail drugs), 2018 SR.............................................. 47

LIST OF BOXES

Box 2.1. Elements for effective spending reviews ................................................................................ 16

Box 5.1. Spending reviews as a tool for aligning with the OECD Recommendation on

Budgetary Governance ............................................................................................................ 38

Box 7.1. The Structural Reform Support Programme (SRSP) ............................................................... 64

file://///NET1.cec.eu.int/HOMES/105/carpeni/Spending%20reviews%20AMA.docx%23_Toc54777556

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FOREWORD

Xavier Vanden Bosch, European Semester Officer in Belgium

This publication draws largely on the Conference entitled ‘Designing, conducting and implementing

spending reviews: lessons-learnt in the EU’ held in 2019 at the European Commission. By design, this

conference targeted an audience of public authorities and policy-makers in Belgium. Under the

European Semester, the cycle of economic and fiscal policy coordination within the EU, the Council

addressed in 2018 a country-specific recommendation to Belgium to carry out spending reviews. A

similar recommendation followed in 2019 and remained a major point of attention for improving the

quality and composition of public finances in the country. At the time, Belgium had not had any

experience with conducting spending reviews. As European Semester Officer for Belgium, whose core

task is to foster close dialogue in Belgium, I saw an opportunity to organise an event on this topic. The

objective was to raise awareness and to allow participants to benefit from the knowledge of the OECD

and the IMF, next to the European Commission. The event was also meant as a practical workshop

where one would learn from the practical experiences of other countries – for example, Spain was

chosen given its federal structure and the UK for its well-established and long-standing experience in

the field.

This project would not have materialised without the support and close involvement of DG Reform

and of DG Ecfin. I am particularly grateful to Elva Bova and Riccardo Ercoli whose expertise,

motivation and team spirit allowed this project – the conference but also this publication – to

materialise. The support of the cabinet of then Prime Minister Charles Michel and Minister of Budget

Sophie Wilmès also proved instrumental for its organisation.

Besides the success of the conference in attracting a large audience, a crucial outcome of the event was

that it initiated a close dialogue between the European Commission and Belgian authorities on

spending reviews. At the time of writing these lines, all government levels in Belgium have taken

steps to carry-out spending reviews, and several have benefited from the support of the EU structural

reform support programme. The OECD produced a feasibility study on the integration of spending

reviews in the budgetary process at the federal level. The Flanders Region, after having fully

implemented the reform of its voucher scheme based on the results of a pilot spending review

(discussed by Koen Algoed in Chapter four), is taking steps towards integrating spending reviews in

its budgetary process. The Brussels Region launched two pilot spending reviews, and took steps to

reinforce its budgeting capacity. The Walloon Region government initiated in 2020 an ambitious zero-

based budgeting and spending review process covering its full budget in the coming years. After all

these important steps, concrete impact will now require sustained political ownership.

Realising that not only Belgian authorities but also all Member Stakes and stakeholders interested in

spending reviews would benefit from the views of so many distinguished speakers, we felt that it

would be a missed opportunity not to also work on a publication. On behalf of the whole team at the

European Commission, I address our sincere thanks to Koen Algoed, José Luis Escrivá, Edward Balls

and Edwin Lau for their precious contributions. These nicely complement the views of the European

Commission through the perspective of DG Ecfin (Elva Bova and Stefan Ciobanu) and DG Reform

(Riccardo Ercoli). The combined expertise and political experience of the authors will allow any

reader to gain a better practical understanding on the process of designing, conducting and

implementing spending reviews.

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1. INTRODUCTION Lucio Pench, Director Fiscal Policy and Policy Mix Directorate, DG ECFIN, European

Commission

Spending reviews have increasingly attracted attention in the EU. They are at the core of fundamental

questions as regards the use of public resources, such as: is spending allocation done in the most

efficient and effective way? Is it aligned with current priorities? By offering a better understanding on

how public resources are and should be spent, spending reviews help governments deal with a number

of issues. They can improve the composition of public expenditure. For example, they could help

targeting spending towards growth-friendly items, or items that promote long-term sustainability,

including of the environment. In addition, by improving expenditure controls, they help make space

for more resources, especially in those settings with limited fiscal space.

In the current context of rising debt levels, spending reviews represent an opportunity. They have the

potential to detect efficiency savings and opportunities for cutting low-priority or ineffective

expenditure, and can therefore help achieve smart fiscal consolidation and free up space for new

policy priorities, e.g. for additional public investment. Spending reviews help also develop a culture of

evaluation in the public administration. The focus on policy results brings closer policies and people,

eliciting a cultural change in the management of public policies. They can indeed help take stock of

the past to come up with better strategies for the future.

As a fundamentally empirical exercise, spending reviews benefit tremendously from learning by doing

and exchange of best practices. In this vein, the European Commission, alongside other major

international institutions (e.g. the OECD and the IMF), has been fostering the refining of Member

States’ expertise in this field. More precisely, it has sustained a continuous exchange of best practice

among countries, it has addressed and developed issues based on evidence and provided technical

support.

Very much with this intent, this publication aims at providing a concrete support to policy makers who

want to approach spending reviews. It delves into issues and problems encountered and addressed by

practitioners in the course of their decision and policy- making. By looking through the lenses of

practitioners, this work is a primer of its kind. As such, it provides guidance and offers solutions to

those in the administrative and political arena working on spending reviews. Targeted to policy

makers and government officials, the publication combines views of both policy makers and

practitioners in national and international institutions with direct experience in the field. It also makes

available some EU Member States’ experiences with a particular focus on the implementation risks

and possible bottlenecks that can come up along the ‘journey’.

The making of spending reviews is tackled through different angles. First, Chapter two explores the

main acquired concepts surrounding spending reviews and presents some stylised facts as concerns

spending reviews in the euro area, developments and challenges (Bova and Ciobanu, DG Ecfin,

European Commission). Chapters three and four address the fundamental question on why

conducting a spending review from the view of the policy maker. This issue is developed through the

eyes of a former Minister (Edward Balls – formerly of UK government) and through the eyes of a

high-level official (Algoed Koen – Government of Flanders). Chapter five examines how to

institutionalise spending reviews in the budgetary process (Edwin Lau - OECD) and Chapter six

screens the challenges encountered in coordinating spending reviews among different levels of

government (José Luis Escrivá - formerly of AIREF). Chapter seven provides lessons learnt from the

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European Commission’s support to Member States: (Riccardo Ercoli, formerly of DG Reform,

European Commission).

This work draws largely on the outputs of a Conference held in 2019 at the European Commission on

‘Designing, conducting and implementing spending reviews: lessons learns in the EU’. The

workshop was organised by the European Commission Representation to Belgium with the intent to

provide some guidance and foods for thoughts to the Belgian authorities on how to carry out spending

reviews, following the 2018 European Council recommendation to Belgium in this area specifically.1

The publication will hopefully bridge a perceived gap in the current literature of spending reviews.

While the use of these reviews has been on the rise, readily accessible tips and guidance for

governments are missing. By explaining the whys and hows related to designing and conducting a

spending review, this publication intends to help practitioners in their task. A result of a concerted

effort among different players, including other international institutions and governments, this work is

a proof of the strong cooperation that the European Commission envisages to maintain and foster with

various experts and practitioners moving forward.

1 Recommendation 1 notably calls to improve the efficiency and composition of public spending at all levels of government to

create room for public investment, in particular by carrying out spending reviews: https://eur-lex.europa.eu/legal-

content/EN/TXT/?qid=1538474984830&uri=CELEX%3A32018H0910%2801%29

https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1538474984830&uri=CELEX%3A32018H0910%2801%29https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1538474984830&uri=CELEX%3A32018H0910%2801%29

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2. SPENDING REVIEWS IN THE EU: THEORY AND PRACTICE Elva Bova and Stefan Ciobanu, Fiscal Governance Unit, DG ECFIN, European

Commission

2.1 INTRODUCTION

This chapter presents the multipronged approach on spending reviews carried forward by the

Commission, and particularly by the Directorate General for Economic and Financial Affairs (DG

Ecfin). Such approach has consisted primarily in producing evidence-based analysis and in promoting

regular exchanges of best practice among Member States, notably within the Eurogroup technical

committees. Drawing on this long-standing gathering of evidence and experiences, the Commission

has regularly assessed spending review practices across Member States. This chapter presents the

compass developed by the Commission to assess progress in the conduct of spending reviews. The

analytical work produced also served as technical background for the support that the Commission,

through its Structural Reform Support Service (now DG Reform), has been offering to Member States

in the field of spending reviews.

The Eurogroup Common Principles on spending reviews, endorsed in 2016, conferred stronger

impetus on the making of spending reviews in the EU. These principles aimed at improving the quality

of public spending through spending reviews. To this end, they provided a valuable compass for the

design and implementation of spending reviews in the subsequent years. Against this compass, the

Commission assesses progress and developments in the context of the European Semester, and for its

annual discussions at the Eurogroup and at its preparatory committees. The examination of countries’

performances in the country reports led in some cases to proposals of country specific

recommendations to the Council.

This chapter summarises concepts and features of spending reviews, it explains the approach

developed by DG Ecfin and provides some selected evidence of these reviews in the EU. The chapter

is structured as follows. The following section (2.2) presents definitions and main features of spending

reviews. Section 2.3 presents the work stream of DG Ecfin and section 2.4 provides some selected

evidence on spending reviews in the EU. Section 2.5 concludes.

2.2 DEFINITION AND MAIN FEATURES

A spending review is the process of identifying and weighing saving options, based on the systematic

scrutiny of baseline expenditure. Contrary to the common budgetary discussions, which gauge the

value of new proposed budgetary lines, spending reviews examine the baseline of existing spending.

This examination assesses mainly whether specific (or all) baseline expenditures (i) are still a priority,

(ii) are effective in reaching their goals and (iii) are cost-effective; namely, whether they can reach the

same goals using the minimum amount of resources. Spending reviews should not be confused with

spending cuts, where the latter only serve the purpose of making room for additional spending and can

be done across-the-board without any efficiency purpose.

Spending reviews serve a few purposes. They are a key tool to enhance the quality of public finance,

as they can promote allocative efficiency. They allow for a re-prioritisation of spending, which usually

entails cutting low-priority or ineffective items while making room for priority expenditure, such as

growth-enhancing or green spending. A spending review is ultimately a tool for public policy

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evaluation. In this respect, it contributes to improving the value for money of public spending by

making public service provision more effective. For example, a review of the pharmaceutical products

provided by the national health sector has the potential to making the provision of health-related

services cheaper and more efficient. Finally, by proposing savings and identifying efficiency gains, a

spending review contributes to freeing up fiscal space, which can be helpful especially for highly

indebted countries. Given the nature of a spending review (as an in-depth analysis), the proposed

spending cuts are not across-the-board cuts, which largely characterised the financial crisis period. On

the contrary, these cuts would rather favour a selective consolidation, which could hence contain

negative repercussions on a country's social fabric and protect essential growth-enhancing items such

as public investment. Proposed savings options after a spending review process can be in the form of

improved efficiency and effectiveness of a specific policy or they can consist in a reallocation or

reduction of public expenditure. Finally, spending reviews can inform budget decisions on future

allocations, particularly when they are institutionalised in the budgetary cycle.

Spending reviews can have a strategic or tactical nature. A strategic spending review realigns

expenditure allocation with government priorities. In many Member States, the composition of public

expenditure still reflects priorities that prevailed at the time spending outlays were first decided: this

can be decades ago. As spending priorities have evolved, public spending reforms have not always

followed suit. Realigning public spending with policy priorities could be done through comprehensive

reviews that do cover a large subset of expenditure over a specific and pre-set period of time. In some

countries, such reviews are launched at the onset of a new government period (in the Netherlands and

Finland). A tactical spending review aims instead at increasing the value delivered for public money

spent by optimising the public funding-impact ratio. Such reviews are tailored to specific programmes

or a narrow subset of spending; they assess the impact of these programmes or spending items, by

examining evaluation reports and/or performance indicators. For tactical reviews, a culture of public

evaluation through performance budgeting is a key condition.2

The scope of spending reviews differs according to political priorities. Reviews can be comprehensive

or targeted. In the first case, they cover the entirety or a large subsect of public expenditure; in the

second case, they cover a specific item or area of public expenditure, for example, health, education,

or social security. Determining the scope of a spending review is a highly strategic decision and

requires political endorsement. This can be done by clearly stating the perimeter of the expenditure

that is reviewed and by setting some targets ex-ante. In some instances, the initial scope can be

extended given the first results. A pilot on a specific subset could also serve as first learning

experience towards a more ambitious exercise. Targets can be quantitative or they can be specific

objectives or performance indicators, such as reduction of time for diagnosis at hospitals.

A spending review process unfolds over different phases, and precisely the design, conduct and

implementation of reforms (Figure 2.1). At the design phase, decisions shall be taken regarding the

scope of the review (which expenditure items are covered?), the governance (who does what?), the

objectives (what are expected savings and/or efficiency gains?) and the time horizon. In the conduct

phase, the administration in charge produces diagnosis by examining expenditure items and proposes

reform and saving options. At the implementation phase, reforms selected from the conduct phase are

taken forward. For each phase, the following elements should be considered:

In the design phase, a clear mandate should be issued by the authorities clarifying the scope, the governance and the objectives and time horizon. Resources should be allocated to

the process, and the institutional framework should be set up with a clear indication of roles

and responsibilities of each player. Ideally, these players would be also under a high-level

centre of coordination, they would work in permanent task forces, and would include

2 For a review of these issues and those in the following paragraphs, see Vandierendonck (2014) https://ec.europa.eu/economy_finance/publications/economic_paper/2014/ecp525_en.htm.

https://ec.europa.eu/economy_finance/publications/economic_paper/2014/ecp525_en.htm

10

participation of line ministries. Participation of external stakeholders (i.e. experts,

academics…) should also be decided upfront.

In the conduct phase, the task forces would produce diagnosis by examining expenditure items and propose reforms and savings options. These can be done by looking at

trends of the expenditure items, comparing them across international or national benchmarks,

checking their effectiveness with respect to some specific performance indicators. For this

phase, the ownership of the administration undergoing the review is key. If not on board, the

concerned administration may be of hindrance to the review process. It could be helpful then

to develop a system of incentives. Also full access to data and information should be ensured.

Another important factor for the success of spending reviews, which applies primarily (but not

exclusively) to the conduct phase, is the coordination among the stakeholders and those

involved in the review. Finally, the use of pilots on contained spending outlays has been

proven to be a very good learning-by-doing exercise, which, by pointing out risks and building

on success factors, helps honing the process of spending review. Once decision of reform

options have been taken, the implementation phase unfolds, and reforms are carried out.

For the implementation phase, a transparent reporting of progress is very important and should be directed not only to the authorities in charge but more broadly to the general public.

Furthermore, it is crucial that the results achieved by the review (either in the form of savings

or efficiency gains) be consistent with what specified in the annual and multi-annual

budgetary plans. For this reason, some countries align the cycle of targeted (and not

comprehensive) spending reviews to their budgetary process, so that savings generated by the

review can be included in the budget law (Australia is a good example).

Figure 2. 1. Phases of the spending review

Source: Vandierendonck 2014.

A strong political commitment is crucial for the review. This should be maintained throughout all the

review phases and should be ideally held at the highest level of government. This typically takes the

form of an explicit and clear buy-in of the Prime Minister or Minister of Finance. The commitment is

more binding if it is enshrined in a clear strategic mandate notably spelling out the objectives and into

regular monitoring and decision-making on reform options generated. Then, the scope and coverage of

the review should be well defined, and a 'command centre' for coordinating the review should be

designated with full political backing and adequate resources.

Evaluation and monitoring should take place at all stages of the review. The monitoring of a spending

review project has to be carefully prepared with adequate staff (Vandierendonck 2014). The

monitoring should focus on the appropriateness of the procedures in place at the design, conduct and

implementation of reforms. An ex-post evaluation of the ways reform options have been generated and

selected and on the implementation of the reforms should also be run.

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Overall, the following success factors are key for spending reviews. First, as mentioned, is the political

commitment to be ensured at all phases of the process and to be communicated in a transparent way.

Second, a well-defined mandate should detail the scope and coverage of the review. Third, a clearly

designated task force or a command centre is key for a smooth unfolding of the review process,

followed by the ownership of the administration undergoing the review and the easy access to data and

information.

2.3 DG ECFIN WORK STREAM ON SPENDING REVIEW

The European Commission has been actively promoting the use of spending reviews in the EU

Member States. This has included first the production of studies intended to enrich the technical

debate on how to better conduct spending reviews.3 Second, consistently with a 2013 mandate from

the ECOFIN Council4, the Commission has played an active role in the organisation of thematic

discussions on spending reviews within the Economic Policy Committee and other Member States

fora, including the Eurogroup. Third, the Commission has in many occasions encouraged Member

States to engage in spending reviews, notably in the framework of the European Semester. This is

reflected in country specific recommendations, endorsed by the Council; for example, those for

Belgium and France in 2018, Spain in 2017 and Italy, France and Portugal in 2016 (Figure 2.2).

Similarly, in its country reports, the Commission discusses the usefulness of undertaking spending

reviews in the Member States and takes stock of the progress in conducting such reviews. Last but by

no means least, the Commission, through its Structural Reform Support Service (currently DG

Reform), has increasingly provided technical support in this area.

3 See for a review: https://www.consilium.europa.eu/media/23582/eg-15-june-2017_note-on-spending-reviews.pdf;

https://www.consilium.europa.eu/media/34836/com-note_ownership-in-spending-reviews_eg_20180518.pdf;

https://www.consilium.europa.eu/media/40626/com_technical-note-to-eg_spending-reviews-to-promote-investment.pdf;

https://ec.europa.eu/economy_finance/publications/economic_paper/2014/pdf/ecp525_en.pdf.

4 ECOFIN Council of 5 March 2013 invited the Economic Policy Committee and Commission to:

"Review budgetary processes and practices conducive to enhanced expenditure performance (e.g. spending reviews,

performance-based budgeting, top-down budgeting etc.) aiming at achieving efficiency gains and sustainability in the public

sector".

https://www.consilium.europa.eu/media/23582/eg-15-june-2017_note-on-spending-reviews.pdfhttps://www.consilium.europa.eu/media/34836/com-note_ownership-in-spending-reviews_eg_20180518.pdfhttps://www.consilium.europa.eu/media/40626/com_technical-note-to-eg_spending-reviews-to-promote-investment.pdfhttps://ec.europa.eu/economy_finance/publications/economic_paper/2014/pdf/ecp525_en.pdf

12

Figure 2. 2. Selected country specific recommendations

MS CSRs MS CSRs

BE 2019: Improve the composition and

efficiency of public spending, in

particular through spending reviews.

LV 2017: Increase the cost-effectiveness of and

access to healthcare, including by reducing out-

of-pocket payments and long waiting times.

ES 2017: Undertake a comprehensive

expenditure review in order to

identify possible areas for improving

spending efficiency.

MT 2017: Expand the scope of the ongoing

spending reviews to the broader public sector

and introduce performance-based public

spending.

FR 2019: Achieve expenditure savings

and efficiency gains across all sub-

sectors of the government, including

by fully specifying and monitoring the

implementation of the concrete

measures needed in the context of

Public Action 2022.

NL 2016: Prioritise public expenditure towards

supporting more investment in research and

development.

IE 2017: Better target government

expenditure, by prioritising public

investment in transport, water

services, and innovation in particular

in support of SMEs.

PL 2019: Take further steps to improve the

efficiency of public spending, including by

improving the budgetary system.

IT 2016: Finalise the reform of the

budgetary process in the course of

2016 and ensure that the spending

review is an integral part of it.

SK 2018: Implement measures to increase the cost

effectiveness of the healthcare system and

develop a more effective healthcare workforce

strategy.

Source: European Council.

The Eurogroup endorsed four common principles on spending reviews in the euro area as a way to

provide general guidance and to promote best practice. As a concrete outcome of the thematic

discussions on spending reviews launched in 2013, in September 2016 the Eurogroup called on euro

area Member States to actively use spending reviews and approved a set of common principles for

improving expenditure allocation through their use.5 These are:

Strong and sustained political commitment at a high national level, throughout the project, is essential for successfully carrying out spending reviews and implementing their findings into

meaningful reforms.

The design and implementation of spending reviews should follow best practices that include: (i) a clear strategic mandate specifying the objectives (potentially including quantified targets)

the scope (a significant share of general government spending across several policies) and a centre of

coordination, (ii) the use of pilots to build expertise, (iii) the provision of adequate resources and

5 https://www.consilium.europa.eu/en/press/press-releases/2016/09/09/eurogroup-statement/.

https://www.consilium.europa.eu/en/press/press-releases/2016/09/09/eurogroup-statement/

13

access to data, (iv) the use of guidelines for consistency in producing diagnosis, baselines, reform

options and implementation roadmaps, (v) the use of fact-based analysis linking spending across

budget and administrative structures to policy outcomes.

Monitoring and communication to the public on the progress and outcome of reviews should be regular and transparent. Spending reviews themselves should be subject to independent ex-

post evaluation to learn lessons for future reviews.

The ambition and conclusions of a spending review should be consistent with annual and multiannual budget planning. The national fiscal framework should include the principle of running

regular spending reviews to inform budget making.

To allow periodic monitoring, the Eurogroup also invited its preparatory committees and the

Commission to develop a work stream on the exchange of best practice and lessons learnt from

spending reviews undertaken in euro area Member States, using these common principles as a

reference point (Figure 2.3).

Figure 2. 3. The Eurogroup Common Principles

Source: European Commission.

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2.4 SELECTED EVIDENCE ON SPENDING REVIEWS

A 2017 Commission survey highlights achievements and challenges in the making of spending

reviews. As a first follow-up to the common principles, a survey addressed to the euro area Member

States was conducted by the Commission during April-May 2017, with its findings informing

dedicated thematic discussions of the Eurogroup in June 2017 and May 2018, respectively. The

objective of the survey was to collect information and screen the experiences with spending reviews at

a granular level, using the compass of the common principles. The survey highlighted that an

increasing number of Member States had shown interest in pursuing spending reviews, with several

reviews launched in recent years. While the 2017 Eurogroup thematic discussion focused on

adherence to the common principles more in general, the 2018 discussion centered on the issue of how

to enhance ownership of the administration under review, which had emerged as a major challenge to

the spending review process. On the issue, a Commission note6 underscored the importance of

involving such administration in the data provision as well as in any form of technical assistance, to

help them upscale the skills to the standards required by the review. While such administration should

be also involved in the monitoring of progress and implementation of the reform, the ministry of

finance should maintain the lead for guidelines, monitoring and communication. In addition, to make

this administration cooperate, a greater involvement of the top political hierarchy and more visibility

through open communication would help.

A new survey was run in 2019, to examine developments with respect to 2017. The spending reviews

reported in the 2019 survey focus more than in the past on growth-enhancing and equity objectives. In

50% of reviews, improving the delivery of public service has been the main trigger for the review,

followed by the reallocation of spending to other or new policies and then fiscal consolidation. The

weight of growth-enhancing objectives has increased with respect to 2017. As regards the objectives

specified in the mandate of spending reviews, identifying and generating savings is the most reported

one, followed by equity considerations. Compared to 2017, the 2019 survey featured a stronger

political commitment in most phases of the spending review process (Figure 2.4). It also highlighted

that Member States were deploying novel and more appropriate forms of institutional coordination to

conduct the reviews, and it pointed to a stronger ownership of the administrations under review than in

2017. On the other hand, commitment remains low when implementing reform options, and the use of

pilots and implementation roadmaps remains limited. Furthermore, monitoring and evaluation are

quite weak and the link between the budgetary and spending review processes is still underdeveloped.

Overall, some major challenges remain (Figure 2.5). These include lack of data, limited ownership of

the administration under review and lack of staff. The survey also collected information on what

factors are key for the success of spending reviews (Box 2.1).

The institutionalisation of spending reviews as a regular budgetary process is still limited. A legal

provision e.g. in an organic law or in the annual budget, requiring the scrutiny of public spending and

establishing the mandate for the project could make the review more binding, by increasing pressure

on high-level officials to deliver on the project. As of 2019, very few Member States have legal

provisions and administrative procedures on spending reviews. Similarly, the link between the

spending review outcomes and the annual and multiannual budget planning remains weak and it is

implemented only in three Member States. Establishing such a link is key for the success of spending

reviews, as it ensures a reflection on the reform proposals and their considerations into budgetary

plans.

6 https://www.consilium.europa.eu/media/34836/com-note_ownership-in-spending-reviews_eg_20180518.pdf.

https://www.consilium.europa.eu/media/34836/com-note_ownership-in-spending-reviews_eg_20180518.pdf

15

Figure 2. 4. Political commitment along the spending review phases

Source: European Commission 2019 survey on spending reviews.

Figure 2 5. Main challenges in conducting a spending review

Source: European Commission 2019 survey on spending reviews.

16

BOX 2. 1. ELEMENTS FOR EFFECTIVE SPENDING REVIEWS

To the question on what was particularly effective and particularly ineffective in the spending reviews, Member

States pointed to some important elements that could enhance the success of spending reviews.

Commitment: political ownership at high levels was particularly important for the effectiveness of spending

reviews. On the contrary, a weak engagement of the political system from the start affects the results of the review

at each stage of the process, as it minimises the incentives for those who have to conduct the analysis.

Communication of the mandate of the review is a major factor to build internal and external support to the process.

Open discussions with stakeholders: consensus and support being a key factor for the effectiveness of

spending reviews, broad discussions involving all stakeholders from the outset of the spending review prove to

be very important. These discussions encourage stakeholders to think "out of the box" and to exchange

innovative ideas, particularly when various ranks of the public administration are involved. In the same vein, line

ministries and stakeholders should be encouraged to propose changes with no limits to the number of proposals

and no restraints on the size/type of measure: ‘no measure is too small to be rejected’.

Empowering line ministries: the modus operandi of relevant ministers matters. Securing their engagement at

early stages of the process throughout a cross-departmental approach and granting them a certain room of

manoeuvre in the process is key. For example, a collaborative process where line ministries have to work jointly

could have beneficial implications on the entire review as it makes those involved know their counterparts in

other ministries; it encourages an open and fair exchange of views and a common search for solutions and

improvements.

Independence and diversity of the task force: the independence of the task force is key for the process and, to

this end, it is particularly important not to pre-set any results, so as to fully transfer the ownership of the exercise

to those involved. In practice, it helps to have external stakeholders in the task force, such as academics and

international experts with a clear mandate to propose measures without necessarily taking into account the

official view of the institutions, so as to exclude any political interference. The task force should then select

measures based on whether they are appropriate and reasonable, way before assessing their political feasibility or

present them to decision makers. Transparency can enhance independence and a way to achieve it is to publish

the analyses of the review. Having a variety of skills and members coming from academia, business leaders and

top civil servants enriches the outcomes of the working groups or task force.

A roadmap with deadlines and a multiannual horizon. Having a well-planned roadmap with a calendar for

meetings on a regular basis and with tight deadlines, at times set by an external consultant, seems to have been a

major factor for the effectiveness of a review. Yet, the timing has to be set consistently with the ambition of the

review. In four cases, Member States reported the schedule to be quite tight to allow a thorough analysis of the

expenditure items under review. Also, in one case it was highlighted that a multi-annual horizon of about three

years was important to ensure continuity of action for a rather complex exercise. Strategically aligning the

publication of spending review papers to the annual budgetary process was effective in terms of providing

evidence to inform the negotiation process.

Tricks for generating results: A factor for effectiveness was indeed the joint treatment of the policy design and

implementation considerations, selecting what to scrutinise based on what could be feasible to reform. Use of

accounting data and cross-cutting of multiple databases to feed into concrete proposals with an impact

assessment was also reported to enhance effectiveness. Regarding evaluation, the possibility of reviewing

performance indicators was particularly valued.

Recent work examined the role of spending reviews for public investment. As a crucial tool for

‘smarter’ expenditure, spending reviews can be instrumental in fostering public investment. Spending

reviews are a fitting tool to boost high-quality public investment for three main reasons. First, these

reviews are crucial given their focus on spending reprioritisation, which could help make room for

public investment, including notably ‘green’ investment, while maintaining fiscal sustainability.

17

Second, spending reviews can increase the efficiency of public investment as the scrutiny process of

the review also allows for improving the value for money of investment projects. Finally, as spending

reviews often entail an overhaul and restructuring of budgetary and policymaking processes, including

closer coordination within the public administration, they can also have a beneficial impact on the

modalities of managing public investment.

A 2019 Commission study7 reflects on the different dimensions of public investment to be taken into

account while conducting such reviews. First, as capital spending relates to changes in assets, an

examination of the stocks of public finance is warranted. Differently from current spending,

investment relates to both stocks and flows. Looking at stocks raises additional issues than those

commonly examined for current spending, including ownership, maintenance and depreciation of the

stock. Second, investment has a time dimension, as it usually spans over a multi-annual horizon. An

investment programme/project typically entails several phases: planning, implementation or execution,

and evaluation. The focus of a review tends to change along these phases. While the bulk of financing

decisions are taken at the planning phase, many changes also occur during implementation, with the

financing being possibly increased or reduced, and, at times, some projects that are part of the

programme could even be abandoned. Finally, investment yields economic and social returns in the

medium to the long-run. As these returns as well as the entire project execution entail some risks, the

examination of these projects done in the conduct phase of the spending review should also include an

assessment of returns and risks. Such assessment might require a different skill-set than the one

usually deployed for diagnosis usually done during reviews of current expenditure items.

2.5 CONCLUSION

The growing recourse to spending reviews in the EU Member States is encouraging. Evidence shows

that an increase number of Member States in the EU have embarked in spending reviews, a positive

sign that governments increasingly recognise them as an important tool in their public financial

management and, not least, in improving the quality of public finances. Some improvements in the

design and conduct of these reviews are already visible, through the regular examination and

assessments brought forward by DG Ecfin. The objectives, design and governance of spending

reviews are evolving in ways that are better tailored to country-specific needs and objectives. Such

welcome change is a sign of greater ownership at the Member States level.

As new priorities have recently emerged for public finances, spending reviews continue to be a crucial

tool for re-assessing and better aligning public expenditures. The COVID-19 pandemic has changed

dramatically the public finance situation across the EU, adding to pre-existing challenges, such as high

debt levels in some Member States. In the current context, spending for the Covid-emergency and the

recovery needs would need to align with other priorities, such as the green and digital transitions.

Spending review processes would be instrumental for accommodating effectively and efficiently the

costs associated with such a complex environment. This would require Member States to scrutinise

expenditure allocations in light of the above-mentioned priorities, in order to generate further

efficiency gains that could be rechannelled towards more stringent spending needs. Finally, progress

in budget evaluation and performance budgeting should complement spending reviews to enhance the

quality of public expenditures.

Going forward, the Commission stands ready to continue to support Member States in this process.

Such support will be offered through a continuation of the analytical work and assessment of practices

in the context of the European Semester. It will also be enhanced by exchange of best practices and

finally by continuous hands-on support in the making of these reviews offered by DG Reform, as

detailed in the last chapter of this publication.

7 https://www.consilium.europa.eu/media/40626/com_technical-note-to-eg_spending-reviews-to-promote-investment.pdf.

https://www.consilium.europa.eu/media/40626/com_technical-note-to-eg_spending-reviews-to-promote-investment.pdf

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3. HOW TO INITIATE A SPENDING REVIEW? Experience from the UK since 19978

Edward Balls, former UK Treasury Chief Economic Adviser and Cabinet Minister9,10

3.1 INTRODUCTION

A finance ministry-led public spending review sounds like a quintessentially technocratic exercise: an

opportunity to make sure that existing public service budgets are being spent as efficiently as possible;

the chance to test whether public spending objectives are properly articulated and capture what the

Government is trying to achieve; and a time to ensure that the allocation of public resources reflects

those objectives. These might sound like the kind of activities that would excite Treasury civil servants

but leave the politicians’ eyes glazing over. In this chapter, drawing upon the UK experience of

regular public spending reviews under the Prime Ministerships of Tony Blair and Gordon Brown

between 1997 and 2010, I am going to argue that the opposite is the case.

While these important activities should and do grab the attention and enthusiasm of career civil

servants, the success of a spending review is vitally dependent on whether the politicians are properly

engaged from the outset and throughout the spending review. In New Labour’s thirteen years in

Government from 1997, it was certainly the case that spending reviews were politically led from the

outset. I know this given my deep involvement from various perspectives. In my role as economic

adviser to Shadow Chancellor Gordon Brown, I drew up our public spending strategy before the 1997

election. As Chief Economic Adviser to the Treasury from 1999 to 2004, I implemented this strategy

and worked with civil servants to deliver four public spending reviews. As the Cabinet Minister in

charge of schools and all children’s services between 2007 and 2010, I then experienced a public

spending review negotiation from the other side, not from a Treasury perspective but as a departmental

Minister.

Drawing on these experiences, this chapter outlines the lessons we learned in the UK over that period,

which I hope will be useful to governments in other countries as they plan public spending reviews for

the future.

8 Based on a presentation to the European Semester Workshop in Belgium. Designing, conducting and implementing spending reviews: lessons-learned in the EU which took place in Brussels, January 2019. The ideas underpinning this chapter

have benefitted greatly from IMF missions to Iceland and Greece, regular study groups I have held at the Harvard Kennedy

School over the last four years and the comments of my co-lecturers and students on the King’s Colllege, London course,

‘ The Treasury Sinde 1945’ which I have co-taught since 2015.

9 Edward Balls is a Research Fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and

Government and a Visiting Professor at King’s College, London. He was UK Treasury Chief Economic Adviser, 1999-2004

and Secretary of State for Children, Schools and Families, 2007-2010.

10 This chapter has benefitted greatly from technical input from my former colleague Richard Hughes with whom I have

worked at both HM Treasury and the IMF. It reflects many conversations we had when working on spending reviews in the

U.K. in the early 2000s and more recently in 2017 before and during an IMF mission to Iceland advising on fiscal

frameworks and performance budgeting. It also draws on his paper “Performance Budgeting in the UK: 10 Lessons from a

Decade of Experience” published in Arizti et al. eds, Results, Performance Budgeting and Trust in Government, World Bank:

Washington DC, 2010.

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3.2 THE 1997 NEW LABOUR FISCAL REFORMS

When Labour came into Government in 1997, we immediately enacted our manifesto commitments on

spending. One of our manifesto commitments had been to operate a medium-term fiscal strategy with

two fiscal rules set and measured over the economic cycle: a Golden Rule requiring the government to

balance current spending against receipts and a Sustainable Investment Rule limiting net public debt to

40% of GDP. In order to make that new macro fiscal regime credible, we also decided to move to

multi-annual spending planning, which we announced at the outset. This enabled a new centre-left

government to demonstrate to the outside world that its tax and spending policies were consistent with

meeting its fiscal rules. We also committed in our manifesto to introduce outcome-based performance

management for central government departments.11 This was critical to demonstrating that a

government, which was determined to increase spending on key public services, was equally

committed to ensuring the efficiency use of those resources.

The first New Labour budget in July 1997 also confirmed the new Government’s manifesto

commitment to hold a Comprehensive Spending Review over the first year of the new Government to

report in the summer of 1998. That review would then set out fixed three-year budgets for each of the

25 departments. These multi-year budgets were initially to be reviewed bi-annually rather than

annually, with the third year becoming the first year of the new three-year period. Alongside Sweden

and the Netherlands, this made the UK one of the first countries to introduce binding multi-year limits

on expenditure. The time horizon for subsequent spending reviews and multi-year budgets was

subsequently extended to three and even four years. A small unallocated reserve was set aside on a

rising profile over the spending review period to deal with the unforeseeable but inevitable

contingencies that could not be funded from departmental expenditure plans. Full ‘end-year flexibility’

would allow departments to carry over any unspent resources from year to year, though caps on total

end-year flexibility carryovers were introduced in subsequent reviews. And, although it was little

noticed at the outset, the Treasury committed to publish performance targets for each department,

known as Public Service Agreements, which would set out what each department was expected to

deliver with their allocated budget. In time, budgets were to be set on an accrual or ‘resource account’

basis, taking account of accrued non-cash expenses such as asset depreciation, pension liabilities, and

provisions.

This was a decisive break from the public spending regime we inherited. Until 1997, with a few

exceptions for investment-heavy departments like transport, the previous government had operated

what amounted to an annual budget process for most departments, with the next year’s allocations

confirmed every autumn in a public spending statement. Before 1997, the Treasury also held back a

large public spending ‘reserve’ which meant that departments didn’t need to plan to work within their

allocated budget but instead haggled to get their share of this reserve during budget execution. There

was no ‘end-year flexibility’ allowing departments to carry over unspent resources from year to year,

prompting regular and inefficient year-end spending splurges to exhaust any unused allocations. There

was no distinction between current and capital budgets, with the latter being routinely raided to meet

the government’s headline fiscal targets. Budgets were cash-based, and the idea of accrual-based or

resource account budgeting or managing the Government’s balance sheet was a distant dream. And

there was no formal system of output or outcome targets by which performance on public spending

was judged.

Although these New Labour public spending reforms may sound technocratic, they had great political

significance. The new Government had been elected on the basis of five very clear economic and

spending pledges, set out on what was called the ‘pledge card’ (Figure 3.1). Each of those manifesto

pledges was designed to be measurable so they could be clearly monitored. The result was that, from

the outset, there was a political commitment to accountability based upon delivering results. The

11 For more detail, see: E Balls & A O’Donnell (eds) Reforming British Economic and Financial Policy, Palgrave Macmillan

2001.

20

government had also committed to deliver these pledges while maintaining fiscal sustainability and

economic stability, objectives which had eluded previous Labour (and indeed Conservative)

governments.

Figure 3. 1. Importance of political commitment

Source: Spending Review and Performance Budgeting- the UK experience, Edward Balls 2019.

Clear commitment to and direct accountability for fiscal responsibility, public expenditure control, and

public service efficiency were considered essential by Prime Minister Tony Blair and Chancellor

Gordon Brown if Labour’s economic credibility was to be established after 18 years in opposition and

a previously mixed economic record. It was this political determination to drive for economic and

fiscal credibility that underpinned our commitment to a Treasury-led spending review, multi-year

budgets, and outcome-based performance; the process was never simply technocratic.

However, there was also further and more hard-headed political reasons for announcing this

Comprehensive Spending Review. The Labour Party had not been in Government for eighteen years

and allocation of public resources reflected the political preferences of a series of Conservative who

had held office over that period. What is more, none of the new senior Cabinet Ministers had ever run

a department before. They were all about to learn, while on the job, about how to manage delivery and

accountability in departments with multi-billion pound budgets. If we were to avoid the new Cabinet

Ministers simply slipping into a lazy incrementalism where their political strength - or otherwise -

depended on how much extra resources they could negotiate from the Treasury, we needed a process

to make them examine and justify their existing budgets from the bottom up. This was the purpose

behind the Review, first announced by Shadow Chancellor Gordon Brown in January 1997, three

months before polling day.

Following New Labour’s first July 1997 Budget, the Treasury established a public spending sub-

committee of the Cabinet, chaired by the Chancellor and populated by senior cabinet ministers who

did not have large public spending budgets. Over the first nine months of the Comprehensive

Spending Review, each spending minister had to appear before this committee to set out how they

21

could achieve efficiency savings and how their budgets were delivering the declared manifesto

objectives of the Government. Then the other cabinet ministers on that committee, chaired by the

Finance Minister, would rigorously question the spending minister, drawing from a detailed steering

brief from the Treasury with lots of difficult questions. It was crucial that this examination was not

from Treasury civil servants to departmental civil servants but happened in a Cabinet-level committee

in which ministers were asking other ministers: “Well, you say you want more money but look at your

record over the last year. What's going on? How do you explain it?” While the bulk of the work and

analysis was undertaken at an administrative level, the review was politically led, and ministers

actively participated in this scrutiny process all the way through. In the final meetings, where

departmental ministers were told how much money they were getting, they were told that in a meeting

with both the Prime Minister and the Finance Minister.

Before the conclusion of the Spending Review in the summer, the aggregate expenditure envelope for

the review was announced in the Spring Budget of 1998. We ensured that the sum of departmental

spending allocations, alongside forecast tax revenues, were consistent with meeting the Government’s

two fiscal rules over the economic cycle. Finally, following a detailed negotiation between the

Treasury and spending departments in the spring and early summer, three-year public spending

budgets were publicly announced for each department alongside agreed reforms.

We had originally intended that this first review would announce performance targets for each

department alongside the public spending allocations. Perhaps inevitably, however, introducing such

ambitious and unprecedented reform proved very difficult. So, while some key targets and objectives

were announced as part of the Comprehensive Spending Review, the Treasury then published a

supplementary document a few weeks later, the Public Service Agreements White Paper, which set out

all the objectives it believed each department should deliver.

This was clearly an unsatisfactorily way to proceed. In the next spending review, two years later in the

summer of 2000, the performance targets were discussed as part of the spending review process and

announced simultaneously with the spending allocations. This was a step forward. But the leadership

in setting those targets came from the Treasury and the Prime Minister’s office; departmental ministers

did not fully own those targets. This improved again in 2002 and 2004, by which point the Treasury

and Prime Minister’s office were asking departments to propose their own output objectives as part of

the negotiation. Departments also increasingly consulted outside stakeholders regarding the

specification and ambition of their performance targets.

This is one example of how, spending review by spending review, our processes improved as our

understanding of how to deliver change got better. As departmental ownership of budgets and

objectives increased, the sophistication and effectiveness of our spending reviews also increased.

While this did take time, I believe that it was only by being ambitious from the outset and being

prepared to make mistakes that we were able to learn how to do things better and build wider support

for the reforms. In the remainder of this chapter, I want to set out some of the lessons which can be

learned from the UK experience of spending reviews.

3.2.1 Lesson one – medium-term and comprehensive

The medium-term orientation of the first Comprehensive Spending Review was a significant break

from the annual incrementalism of the past. In truth, it took some time for departmental ministers and

their civil servants to be persuaded that the Treasury was serious when we said we were genuinely

setting three-year budgets on which they could depend and plan, without a smash and grab Treasury

raid a few months later, or that we would allow end-year flexibility to carry forward unspent

resources. But without this medium-term orientation, a meaningful discussion of long-term objectives

wouldn’t have been possible. And once the medium-term orientation of spending planning was

22

established, it did allow much more focus on delivery and spend-to-save reforms through which a

department would invest in changes in year one to produce savings further down the line.

This medium-term orientation was also important to underpin the credibility of medium-term fiscal

planning. Setting of the total public spending envelope for the review in the preceding Spring Budget

also helped to make the exercise credible in the eyes of both markets and departmental ministers. It

made it credible to markets because the total level of expenditure was driven by ‘top-down’

macroeconomic considerations around what was affordable within our fiscal rules. It made it credible

to departments, because it removed the possibility of increasing the aggregate expenditure envelope to

accommodate any last minute requests or special pleading.

Over the course of the twelve months of the spending review, Treasury analysis and scrutiny of

departmental plans and objectives was critical. However, we learned that this analysis could only take

us so far; in the final weeks of the spending review process, we needed to leave time for the political

negotiation and hard choices to be made - both between departments and for departments themselves

to choose their own priorities.

These choices and the trade-offs which underpinned them - between different objectives and

sometimes between different departments - are only meaningful, however, if the spending review is

comprehensive and covers the whole of Government spending. An efficiency review of one aspect of

public spending can provide useful information and analysis, but we learned that it is only when the

Government looks comprehensively across all its activities that tough choices can be made. Rolling,

targeted reviews that look at only a portion of public spending in any one exercise can improve

operational efficiency (i.e. the efficiency with which resources are used in the delivery of a particular

public policy objective) but they cannot deliver significant improvements in allocative efficiency (i.e.

a more efficient allocation of resources between competing public policy objectives).

As for the politicians, my experience has been that the Prime Minister, Finance Minister and

individual government ministers are intensively interested in spending reviews if they know tough

choices are being made about the entirety of Government spending priorities for years ahead. They

tend to be less engaged and collectively committed to the outcome of technical exercises focused more

narrowly on improving the utilisation of resources in a given domain.

3.2.2 Lesson two – choosing the right targets

When, in the late summer of 1998, the Government announced performance targets covering all public

spending departments, it was doing something which had not been done before in the UK. Nor was

there significant international experience from which we could learn. As a result, we certainly did not

get it right in the beginning and, as we continued to learn, the number and specification of those

performance targets changed from review to review.

23

Figure 3. 2. Evolution of public service agreements

Source: Spending Review and Performance Budgeting- the UK experience, Edward Balls 2019.

As the chart in Figure 3.2 shows, the quantity of our performance targets changed markedly over the

first five reviews of the Government. In the 1998 review, we announced over 300 different output

targets or Public Service Agreements, which proved to be far too many. Having too many, and

sometimes conflicting, targets undermined departmental ownership and accountability and

overwhelmed an administrative machine that was still getting used to the idea of accountability not

only for sticking to multi-year budgets but also using those resources to deliver measurable

improvements in people’s lives. Accordingly, the number of targets were progressively reduced in

subsequent review until it reached 110 (roughly 4 per department) six years later.

Moreover, the nature of the targets evolved too. In the first 1998 review, most targets were input based

– how many nurses, how many doctors, how many university places – rather than about the outcomes

being generated – number of clinical interventions or qualified graduates - let alone the outcomes that

the public would experience – survival rates for heart disease or cancer post diagnosis. As we gained

experience with spending reviews and developed a more sophisticated understanding of the

‘production function’ between spending, inputs, outputs, and outcome for different public services,

this gave us increasing confidence to set increasingly outcome-based performance targets.

24

Figure 3. 3. Smartening up PSA targets

Source: Spending Review and Performance Budgeting- the UK experience, Edward Balls 2019.

Many of the targets that we set in 1998, or departments proposed in 2000, were either vague,

unrealistic or unambitious. Again, that balance shifted review by review. We focused hard on ensuring

targets were stretching, measurable, affordable, results-based and time-bound so that success or failure

could be properly assessed. Data was also key. We found that credibility of output targets stands or

falls on whether they can be properly measured. In later reviews, we asked the National Audit Office

to evaluate the quality our Public Service Agreement targets and the data systems used to measure

performance against them (Figure 3.3).

The ownership of shared objectives was another area where our thinking evolved review by review. In

the first 1998 review, every output target was allocated to one individual department. But many

government tasks are inevitably cross-cutting with success depending on the combined action of

different departments or agencies. Reducing youth crime, for example, depends on the actions of the

Justice Department, the Home Affairs Department, the police, schools, the department responsible for

youth services, as well as citizens themselves. So, review by review we increased the number of

shared objectives.

As the Government became more sophisticated at setting output targets and ministers became more

engaged in how objectives were delivered, the importance of cross-cutting objectives grew in

importance. Several innovations were tried to improve cross-departmental collaboration, including

shared targets, jointly-managed budgets or dual-key arrangements, whereby spending programmes

managed by one department could only be signed off with the agreement of another minister from a

different department. It should be noted, however, that the Government’s attempt in 2007 to make all

targets high-level and cross-cutting was a mistake, which I believe blunted accountability which,

under the Westminster political and administrative tradition, remains firmly department-based.

One clear learning point in this process is that culture change is hard and takes time. We learned in the

1998 review that departmental ministers must be involved in designing the targets from the start

otherwise they will not take them seriously. Even then, encouraging departments to really take these

departmental outcome targets seriously takes time - spending departments were used to doing things

25

the old way and wary of cascading down their new freedoms and flexibilities, such as end-year

flexibility, to their own spending agencies. It takes patience to teach an old dog new tricks

A decade after the first spending review was announced, my experience as a departmental minister, in

charge of schools and children’s services between 2007 and 2010, was that the process of engaging the

department and the wider community in devising and monitoring effective output targets was

innovative as well as rewarding. Here are three areas where it made a difference:

1. In schools, it was only through detailed analysis of school by school of performance and the links between performance and deprivation that we discovered how many schools

were ‘coasting’ with above average overall performance in per-pupil testing but poor

performance amongst disadvantaged students – a poor performance which was masked by

looking only at average attainment when disadvantaged children only constituted a minority of

total students in the school.

2. In teenage pregnancy, where there was a wide variance area by area across the country, we discovered there was actually little correlation between deprivation or other

factors and the number of teenage pregnancies. Instead, the driver was leadership at the local

level between the local council, local health leadership, general practitioners and schools to

ensure information and contraception was available in a timely way.

3. In child protection, our work to find a way to measure child safeguarding area by area prompted us to start collecting information about non-accidental child injuries presented at

hospital accident and emergency departments. This threw up surprising variations across the

country and led us to then ask tough questions about local child protection performance and

collaboration with police and wider services.

In all three of these areas, high-level spending review and output target analysis led to very detailed,

local and effective improvements in service delivery.

3.2.3 Lesson three – political buy-in is essential

Setting multi-year budgets and outcome targets for public spending through a spending review is an

effective tool to improve efficiency and drive performance - but only if they are politically led. So,

buy-in from the political leadership is vital. In my experience, that must start early in the process and it

must start with the Prime Minister and the Finance Minister. If they see the spending review as a key

tool to ensure that the Government delivers on its promises and is held to account by Parliament and

the public, then departmental ministers and civil servants will also engage in the process to improve

efficiency and performance.

If departmental ministers do not think the Prime Minister and the Finance Minister care, they are

unlikely to think that meeting their output targets or taking the review seriously will have a material

impact on either the resources available for their department or the scrutiny they face from Parliament,

let alone their promotion prospects. Furthermore, if ministers think the Prime Minister or Finance

Minister will not respect the integrity of three-year budgets or end-year flexibility or allow a culture of

short-term incrementalism to govern their actions then it is much harder to require departmental

ministers to engage properly with the spending review. Therefore, the signals sent by the Prime

Minister and the Finance Minister about their commitment to the spending review and to outcome

targets are vital to getting the maximum value out of the spending review process.

This being true, the political reality is that there must be some flexibility for the centre of government

to solve problems as they come along. For example, although frowned upon by purists, the fact that

26

the Finance Ministry and the Prime Minister’s office together managed some small but significant

central budgets – a capital modernisation fund and a spend to save budget – between 1997 and 2010,

allowed innovation and budget announcements that served as an important lever in making the system

work.

In the UK, the Prime Minister and Chancellor were heavily engaged from the outset. However, as our

experience with spending reviews evolved, we decided to put in place an important reform which

increased ministerial engagement. In 2001, the Government established a Prime Minister’s Delivery

Unit that was based in the Prime Minister’s office and had the head of the new Unit reporting directly

to the Prime Minister. It was the job of the Delivery Unit to monitor and assess each department’s

performance against their published output objectives. A team of civil servants and experts compiled

regular delivery reports for each department which covered not only their likelihood of delivery with a

green, amber and red traffic light system but also an assessment of their capacity to deliver progress

and the quality of their planning and performance management.

Departmental ministers were then summoned to regular meetings, attended personally by the Prime

Minister and the Finance Minister, where the departmental minister and the senior civil servants had to

explain the findings of the Delivery Unit’s report. They had to justify when targets were going off

track and set out what they would do to improve capacity and performance. Rather than cover all 100+

PSA targets, these top-level meetings focused on the 25 targets most important to the Prime Minister,

either because of their importance for citizens or political significance for the Government as a whole

(e.g. if they were in the most recent election manifesto).

A good performance at that meeting was vital. A poor one would have certainly undermined the

minister’s standing within his own department, as well as in the eyes of the Prime Minister.

Importantly, the outcome of these meetings also had a material impact on the strength of any bid for

extra funding in the spending review. Furthermore, both the Prime Minister and the Chancellor were

personally committed to attending those meetings, not least because their own credibility depended

upon the delivery of the output targets the Government had announced.

There is no doubt in my mind that the Prime Minister’s Delivery Unit improved our analytic

capabilities, improved our ability to set outcome objectives and increased the challenge and

effectiveness of the spending reviews. It also entrenched another important lesson – that because the

setting of public objectives and their delivery is so important politically, a regular and early political

sanity check by ministers, political advisers and the Prime Minister’s office is necessary to make sure

things do not go awry.

3.2.4 Lesson four – managing devolution

Every country is, of course, different and a set of reforms to public spending planning in a majoritarian

parliamentary system without a long experience of federal government will not simply translate over

to federal systems used to coalition government. But over the thirteen years of the Labour Government

after 1997, important steps towards devolution did occur with the great administrative freedoms for

local governments, the election of regional English mayors and new parliaments and devolved

administrations in Scotland and Wales. In this section, I will reflect on how devolutions changed how

spending reviews were managed.

The first 1998 Comprehensive Spending Review did not properly engage local governments in

England, who continued to set only one-year budgets. It took time, seven years in fact, before the

Government in Westminster was finally willing to hand over three-year budgets to local governments,

reflecting a growing sentiment for more devolution and local decision-making. Of course, for local

governments, the quantity of spending was important. But as important were the non-spending rules

set from the centre: whether money was to be ring-fenced to be spent in a way and the wider

administrative rules that central government placed on expenditure. Progressively, and I believe in an

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empowering way, local governments increasingly saw spending reviews as an opportunity to make the

case that they should have more freedom, more local decision-making, less rules and strictures from

the centre. Moreover, the more we saw that outcomes depended upon a partnership between central

government and local governments, the more spending reviews came to focus on how best to

encourage the greater collaboration and local flexibility to meet those objectives. As a spending

minister, with national responsibility for outputs delivered locally, I increasingly found that

independent inspection of local government capacity and performance, with the results of that

inspection made public, was a vital counterpart to local flexibility and freedom to innovate.

For the devolved administrations, the challenge was very different. For them, the spending review

allocated them a quantum of money for devolved spending, based on a formula related to how much

Westminster allocated to England, with no strings attached as to how it should be spent. But the timing

of the review was important. We learned that if we took a long time on our Westminster review, then

that left them almost no time at all to then deal with the consequences for their own administrations.

We learned that to make devolution work, the first stage must be finished with enough time to allow

the next stage - devolved administrations or local governments – to go through the same process

themselves.

3.3 CONCLUSION

Of course, no public spending planning system can be robust to all eventualities. The onset of the

global financial crisis in 2007 and large rise in fiscal deficits that followed proved very challenging for

public spending planning. Suddenly with fiscal rules under pressure it was hard to maintain a

commitment to multi-annual spending planning. The fact that several departments had built up

substantial multi-billion-pound reserves of unspent carry-over spending proved too great a temptation

for the Finance ministry to raid in order to enforce fiscal discipline and prevent borrowing from

overshooting the Treasury’s forecast.

While the change of government in 2010 was followed immediately by a new spending review, the

new Coalition Government led by Prime Minister David Cameron decided, in my view mistakenly and

short-sightedly, to dispense with outcome targets at a time when their public spending reductions

would inevitably require a scaling back of ambition or targets to be missed. This was justified at the

time as liberating line ministries from the deadening hand of Treasury control, but a more cynical

explanation would be that the government did not want to voluntarily broadcast the consequences of

sust